I work in publishing and I like to read things. Herewith: free association on books, nice things I ate, publishing, editing, and other nice things I ate.

Wednesday, May 20, 2009

And You Thought a Royalty Involved a Crown

My mother has read and loved a particular book I edited. Last week, she asked, out of curiosity, how much money that favorite author of hers might make off the book. Well, I said, there's an advance, I said, but really what matters is royalties, but you can't just assume those are rolling in every six months, since there's a reserve against returns, but then there's rights sales that are straight pocket change, but there's a fee for the...

Her eyebrows came down into her nose and her mouth pursed fretfully as she tried to follow me. Watching these changes come over her face, I started listening to myself and the malarkey I spoke. I realized that royalty accounting must be SO mysterious to anyone unpublished. Or published. Or anyone. I realized even I didn't really know what I was talking about.

So here is my imperfect attempt to describe to you an author's possibilities for making money with her/his books. I don't claim the final word, and I welcome amendments. But I think everyone deserves to know how they might profit from their work, because it might help them make good decisions about their writing and publication processes.

Let's try to go in rough chronological order.

The AdvanceWhat does "advance" mean: It's money "advanced" to you against royalties, meaning it's a loan the publisher gives you in a lump sum under the assumption that your book will make enough money for said publisher that the advance will be recouped. This means that you will start earning royalties when and only if your book makes enough money that your publisher's advance to you it paid back, using your negotiated royalty percentage as a marker. If your advance is $10,000, your royalty is 10%, and your cover price is $25.00, you will need to sell 4,000 copies of your book before you start making additional royalties. This is called earnout.

How the advance is divided: Either in half of thirds--usually. If it's a smaller advance (or your agent manages to force them to agree to this), your publisher might agree to pay it in two lumps, often half on signing, half on delivery and acceptance of your final manuscript. If it's larger advance, you'll probably get a third on signing, a third on delivery and acceptance (or d&a), a third on publication.

The Royalties:What are typical royalty percentages: Standard royalties for new books are as follows: 10% for hardcover, 7% (or sometimes 7.5%) for trade paperback, and 5% for mass market. Often, publishers will agree to incentive escalators (usually only on hardcovers). Here's a very typical hardcover example:

10% on the first 5,000 copies sold12.5% on the next 5,000 copies sold15% thereafter

When royalties are paid: As we mentioned above, you'll only start earning additional royalties when your advance has earned out. Supposing your book has earned out, royalties are (at most companies) paid every 6 months, in statements that go directly to agents.

Reserve against returns: This is the reason you won't have gotten every royalty dollar you were due during a period. Your publisher has a right to retain up to a certain percentage of your royalties--the actual percentage varies on your contract and on the situation--against future returns from booksellers. Returns are pretty complicated; we've talked about them before, but they're always hard to wrap our heads around. These are big, corporate returns, not the kind of customer-by-customer returns ("My Aunt Wanda bought this cookbook for me but I don't like Russian casseroles" etc). Basically, there are scenarios wherein a publisher may print and sell 10,000 requested copies of a book to book sellers, and, if expectation was wrong, receive all 10,000 copies back, for which they'd have to relinquish the entire dollar amount they originally earned for those books. Alas for returnable industries. The reserve against returns clause gives publishers some measure of protection against total bankrupcy (since, after all, we still have to pay for printing).

This means that especially the first royalty period you have will have a dent taken out of it--the publisher's reserved cash, since in many cases it takes a lot longer than 6 months for all returns to be processed. So there will be a chunk missing, but if your book is selling through well, that money will come to you the period after. Some delayed gratification there (I never claimed it was a living wage, recall).

Rights sales:How they get diced: You'll earn different percentages of dollar figures depending on who retained the rights and who made the deal. I've listed some more complicated scenarios below, but basically your agent, your publisher, and a foreign co-agent may all be taking chunks out of your rights advances (which, by the way, earn out just like a regular advance). Generally, you earn the most money off of rights yur agent retained for you and then sold herself, because none of the middlepeople took a cut. That said, before you decide in an overhead contract whether to sell or retain rights, you and your agent must take an honest inventory of her outreach and labor hours, and evaluate whether you'll realistically make more money by selling rights via the corporate machine that is your originating publisher (varies on the size of the agency, usually).

When rights deal advances are paid: The good news is, rights sales wrap into your advance, so in some cases (this has happened with many of my authors) an advance can earn out on rights sales alone before the book even hits shelves.

A couple of complicated scenarios designed to illustrate some of the math(Please note: all dollar values below are designed to make math easy, not to reflect typical advances for these kinds of sales)

Scenario 1: Your US publisher sells UK/Commonwealth rights to a British publisher for $10,000 at a 10% hardcover royalty and sell 1,000 copies, so the book only just earns out.To note: a usual Commonwealth sale split is 60/40, meaning the author gets 60% of the sale, the publisher, who made the sale, keeps 40%

Scenario 2: Your US publisher retains Commonwealth rights and distributes their own edition. They sell 1,000 hardcover copies at 10 pounds a copy.To note: Publishers usually distribute their editions to foreign countries on export terms, which involve a reduced royalty (probably 10% of net billing, or billing less expenses, on a hardcover instead of 10% of gross, or total, billing--it works out to about half).

[mini-lesson: the more copies you get out, the better the rights sale works for you than the distribution would have; the inverse is usually also true, unless someone way overpays an advance.]Scenario 3: Your agent retained your Commonwealth rights, and sells them directly to a British publisher for $10,000. The book goes on to sell 1000 copies at 10 GBP and 10% royalty.

Your cash: $10,000 upfront, minus your agent's commission, so $8,500.

Scenario 4: Your agent retained your Commonwealth rights, but then your US publication didn't perform well enough that a Commonwealth publisher could afford to do their own printrun. They would have run off with a US publisher, but now it's too late for that. So no Commonwealth sale.

Your cash: $0

I hope this has been helpful. Please hit me up with questions. I'm a font of occasionally correct if generally irrelevant information.

Now that you've finished this Royalties seminar, I award you this tiara:

73 comments:

I like and appreciate this post. I just received my first ever royalty check/statement last week and it wasn't majestic, but you won't get a complaint from me - I'm just happy to be here. :) I think what you've laid out here is info. every new author should know. Thanks!

Eyes a-goggle here. Thanks for laying it out in plain English -- this had to be a complicated post to write.

At least for non-fiction authors who publish more than once with the same publisher, there's (sometimes, probably not always) an additional escape hatch for the publisher. It's called cross deductions, and it allows the publisher to--- well, let's take an example:

Book 1: Publisher advances $10,000. After returns (etc.), book earns only $8,000.

Book 2: Publisher again advances $10,000. However, on the theory (I guess) that the publisher is still "owed" $2K for Book 1, author won't start earning additional royalties until Book 2 brings in $10K after returns (advance for Book 2), PLUS $2K ("leftover" money to be earned back for Book 1) = $12K.

And so on, through Books 3, 4, etc. So by the time Book 4 or 5 comes out, unless they're selling phenomenally well, the author basically has to learn to live on advances -- s/he will never catch up to the point where royalty checks actually start rolling in. The effective royalty rate, thus, is 0% over the entire life of the series -- irrespective of the contract's stated rate.

Naaaaaasty.An agent may or may not be able to kill the cross-deductions clause, maybe in exchange for some other rights downstream.

Wait, we still get a crown right? I want mine to come in the final advance before publication. I will wear it to all my book signings and PR events. It is a deal breaker and a MUST.

Okay, glad I got that off my chest.

Thanks for the awesome info. I will be bookmarking this for that wonderful day that I finish my edits and query an agent and have said agent and an editor all within minutes of hitting the send button. ;)

Scenario 1: You may want to point out that this scenario assumes you have earned out in the United States.

If instead we assume you still have $10,000 left before earnout, you might think that the UK deal gets you there. But my understanding is that the publisher's 40% doesn't count toward your advance, because they "bought" those rights--so only the $6,000 that is "yours" goes toward the advance. You would still be $4,000 away from earning out--but all of that $6,000 would go toward earnout (instead of $5,100) because your agent only gets paid when you do.

Scenario 3: Smaller detail, but it may be worth pointing out that agents often take a higher percentage of foreign rights sales, particularly at agencies with foreign rights departments. I've heard of 20% and even 25%, though that's not from anything resembling a scientific sample.

For more on foreign rights breakdown (especially the choice between keeping and selling rights), my wife did a huge post a couple years back that is quite dizzying.

Also, JES, thanks for pointing out "cross deductions." I've heard the practice referred to in fiction writing as "joint accounting." What you hope to get instead is "separate accounting," where if the first book (or second, or third...) doesn't earn out its portion of the contract, you could still potentially reap royalties on the other books.

Moonrat, I think your earn-out calculations are off on your very first example. If you get a $10,000advance and earn a 10% royalty, those royalties are usually net, right? Not based on cover price? So, with a $25 cover price, most sales are actually at a 40-50% discount, so you're going to have to sell more like 6000-8000 copies to earn out the advance, right? I think that's another thing authors may not take into account...most sales are for a lot less than cover price, so you earn less per book.

Royalties are generally on cover price, so discounts, etc. make no difference to the author.I've long since earned out on my first book, published in 2005. It's now out of print, but in ebook and audio format - good thing, because I'm raking in the cash. Last royalty check from my agent was $.48.Yes, that's right - 48 cents.Dayam, it's good to be published.

JES--yes, thanks for the reminder there. Per Kenny we often call that "joint accounting" and usually the only way an author can avoid it is by having competitive bidding for a book or a very strong previous track record. It's not always a bad thing (from the publisher's evil perspective)--sometimes it can be an excuse for taking on a pet project of a beloved author's, even when there's no expectation it will be a commercial success.

Bookish Cook--actually, where we are right now, royalties are almost all based on cover price. (Domestic royalties, that is.) There are a few companies who are trying to institute net royalties, but the percentages are double (usually)--20% of net billing for hardcover, 15% for trade paper, etc. I've worked on both standards, and can say safely that generally the author makes more money with gross accounting than with net.

There are, however, a couple of companies that have managed to completely institute net accounting. I won't list them here. But I will say I know for a fact that they're not the majority--at this moment.

48 cents? Sheesh. I make more than that on AdSense, and hey, I'm really liking this idea -- sell the name of one of your characters; some goon paid $40K to get his wife's name in one of Elmore Leonard's books, and then paid $5K for his own, but at $5K you only get to be a ghost. I'm going to get my next degree in sales and marketing. It's all about product placement and branding, baby.

I think this post also goes to show (yet again) the benefit of a good agent. Mine retained all rights because he has a good network of co-agents in territories around the world. And the sale of those rights, even to just a few countries, has made the difference between a few extra quid in the bank and a livable income. He also dodged that joint accounting thing, which I would have known nothing about unless he caught it.

On the other hand, those co-agents also need paying, so their commission goes on top of my agent's. But the added value more than compensates.

Yes, thanks for this post, it's very very helpful on such a confusing topic! I always think it's hard to decide which is more beneficial: retaining those rights or selling them to the house. Another thing this post doesn't really get into is that usually (in my experience) the house pays MORE to get those foreign rights (you get a higher advance from them). Back when I was trying to decide which way to go, I created a whole spreadsheet and it worked out that overall I'd get more money by selling the rights to my house than retaining them (though the money would come in over the long run).

The other reason I decided to sell the rights is a more nebulous one: I figured if the house earns back its money on my book then they'd probably want to buy more from me. And it's worked. My first two books have earned out (before the first was published and the second was written) and my third book is almost earned out. The house has already come to us asking for more books. I didn't get all that foreign money up front like I could have if I'd kept the rights (and who knows if my agent could have sold them as well as the house) but I'll be getting that money on the back end in royalties plus a little more job security from my US house.

Thank you so much for this post. Here's my question: once a publisher agrees to buy a book and the advance amount has been established, how much leeway does an agent have in terms of negotiating the actual contract?

Well.....if your agent retained your Commonwealth rights, but then your US publication didn't perform well enough that a Commonwealth publisher could afford to do their own printrun. They would have run off with a US publisher, but now it's too late for that. So no Commonwealth sale.......so you don't even have the money to BUY a light bulb!

The most frequent incentive bonus is an earnout bonus--generally along the lines of "if the book earns out in the first year after publication, the publisher will advance an additional $5000" (or whatever).

In practice, most bonuses are effectively meaningless (otherwise publishers wouldn't commit to them so easily). Because think about it--if your book has earned out after one year, the publisher should be pleased with how you've performed, and will have already guaranteed they haven't LOST money on you. So the risk for them is very low. The cash is nice for the author, though, of course.

Another bonus I've seen used pretty often is the paperback earnout bonus--basically, if the book earns out in hardcover, a $10,000 (or whatever) additional advance is awarded upon paperback publication.

Notice in both cases I've said ADVANCE--in situations I've seen, the bonus is also against royalties, just like the advance. So the publisher incurs SOME small risk, but it's pretty small.

Anon 4:40: quite a lot. For some reason, the fixation is often on the advance money, or the advance and royalties. (It's always funny to me when agents prioritize a higher advance now over higher royalties... it seems terribly short-sighted. But anyway, separate convo.) Secondly, the territory is often a key part of the offer, and sometimes is a dealbreaker. But after that, most things have push and pull.

There are things any agent worth any salt will ALWAYS ask for. And there are things that publishing companies (unless they are silly or desperate) will never, ever agree to. But after that, most things are softer. Eg and agent might say "Ok, fine, we'll let you guys have translation rights, since your publishing company has such a great foreign sales team, but I'll only give them up on the condition that you make the percentage split 80/20 instead of 60/40."

But to answer your questions, I think interest in Asia is going to rise. Even if I have to make it happen single-handedly!! But I don't. There are a lot of awesome authors publishing interesting fiction and nonfiction about all parts of Asia.

And the rally monkey (as my boyfriend is known around here) is a Filipino-American and has totally sucked me into his world of delicious foodstuffs and sprawling Catholic families. To explain part of that.

Malanie--well, Stephenie Meyers is one of those cases where I'm sure everyone involved is quite fiscally comfortable.

First of all, she has an awesome and powerful agent, who certainly retained film rights. The film option probably sold for several million dollars--possibly more, because of the phenomenon her books are--and that went straight into her pocket (minus 15%, but possibly plus film royalties).

On the books, I believe she's sold about 20 million copies of her various books now in English-speaking countries (I think). So assuming (for a totally arbitrary number) she made $1 in royalties off each copy, she's earned out and then some. Some millions.

I can't even begin to guess how much she's worth. But hey--she seems to be really nice, and she's into helping other writers. Both things I like.

My future plan for when I'm published: to make it easier for me to cope, my advance can be ploughed back into marketing the book. I'll consider it a short term sacrifice for a long-term gain (the higher an author's profile, the more books get sold. The more books that get sold, the more royalties I get. The more royalties I get, the more I can afford an accountant to worry about this for me!).

Anon 4:40: quite a lot. For some reason, the fixation is often on the advance money, or the advance and royalties. (It's always funny to me when agents prioritize a higher advance now over higher royalties... it seems terribly short-sighted.

I understand that arguement EA but... when you deal with a publisher such as mine, you grab the advance and as much of it as you can, because it will be, for years afterward, like pulling teeth to get your royalty cheques. A bird in the hand and all that.Of course, if this were a large US publisher, I would not have the same mind set:)

Then there's the issue of royalties being a percentage of net or of gross. I can never remember which usually is the higher or lower percentage -- and more importantly, which is more favorable to the author.

Also, while most publishers' three-installment advance pays the last installment upon acceptance of the manuscript, a few pay the last on publication. I've just been screwed with this one. My most recent book was contracted to be published in April 2008. It's now SUPPOSED TO come out May 30, 2009. Not only have I therefore yet to receive the final third of my advance, but I will be hurt royalty-wise. If the original publication date had been met, mine would have been the only book on the topic. Now, two more have come out -- and a third competitor is pending publication. I try to console myself that there will now be enough titles for there to be a section on bookstore shelves, but it is small consolation.

Claire--it's net royalties that are a higher percentage (usually double), and gross royalties are better for the author (usually only marginally, but sometimes more than marginally). Usually whether a contract is net or gross is not negotiable, though.

I'd like to add one thing regarding foreign rights sales. It is my understanding that many agents use an additional "in country" agent for these deals, and that the "in country" agent often gets a 20% commission.

With my e-publisher, the contract pays out 30-35% per ebook. Of course there are no advances, as seems to be typical for this segment, but if you can promo/sell lots of ebooks, the opp for better money is certainly there.

Plus, as I understand things from recent news stories, very few traditional publishers are taking on new authors. It simply costs them too much, and their traditional business model is making less and less of a profit. Ebooks seem to be the wave of the future more so now than ever.

Wow, you are a beacon of light in a very dark tunnel. Can I put forward my bit of mind-boggling maths? I'm a first time author/illustrator of picture books in the Uk. My first book was fought over by two publishers (lucky me) and i signed two book deal with big publisher. £7500 advance on first book. The book was then sold to America and two other countries. The american deal went to a big auction between three publishers for a month, and was eventually sold-20,000 copies bought (lucky me again!). The book is now out. When will i get royalties? I have 10% royalty and 90% rights i think... when will i see the money? min x

Minibrit--if your publisher is like most, they pay royalties twice a year. And since the royalties on your books in your home country are going straight into their coffers, they owe you any earnout money at the earliest payable moment--meaning your WORST case scenario is you'll get paid six months from now. More likely you'll get paid in Oct or Nov--most publishers have one royalty accounting period that ends in Oct/Nov, one that ends in April/May. But there's no rule.

As for the foreign advance, alas this could take longer. It depends on the advance split in the contract between your native and foreign publishers. For the sake of argument, let's say half is due on signature of contract, half is due on publication. Since those monies are getting funneled through your native publisher, who only owes you money twice a year (cf above), you're at the mercy of how long it takes to get the contract signed. That plus six months is your worst case scenario for getting your first advance; foreign publication of the book plus six months is your worst case for the rest of the money.

Thankyou for answering I really appreciate it! And for writing in a way I can understand! Have you thought about writing a book yourself?? Lifting the myths on book royalties, and explaining the maze that is getting a book published.